The present situation is, in essence, a reflection of the global developments over the last year. There has been a clear shift in the attitudes of international investors. There is an increased caution and, in the aftermath of the Asian crisis, risks in all developing markets, including the Eastern European markets, are perceived to be somewhat higher than previously thought. It is the first time the direction of the Estonian market has been clearly influenced by international trends.
The changes in the Estonian economy in general have also had an impact on the stock market. Over the last year the central bank has taken measures to curb an excessive optimism and too rapid expansion by imposing stricter capital adequacy requirements, an additional liquidity requirement and broadening the list of financial instruments that must be covered by reserves held with the central bank.
Besides, the existing central bank reserves which form the backup for the Estonian kroon, cannot, in any circumstances, either directly or indirectly, be used by the government. This special reserve is placed with international financial institutions outside Estonia following the same risk management guidelines that apply to the management of the central bank's reserves.
These developments have had an obvious impact on the liquidity - and banks' ability to receive and to lend money. The funds available for investment on the securities market decreased. The same applies to the turnovers and the prices of shares. Obviously the psychology of the local investor has changed.
How has the stock market influenced the Estonian economy?
The influence is not one-sided. The economy and the stock exchange influence one another. The same developments and processes that affect the situation on the financial market inevitably have an effect on the broader economic scene. It should be stressed, however, that while the level of sophistication, development and capitalization of the Estonian financial markets in general is quite high for a transition economy, the Estonian stock market is relatively small compared to the economy. In other countries the share of the stock markets in the GNP is much higher.
What do you think about separating investment banking from the commercial banking activities?
The separation of investment banking activities from commercial banking activities is one of the possible ways to decrease the risk environment in the banking sector from the point of view of the depositor. However, there have been examples in the United States, when the former strict separation of investment banking and commercial banking was abandoned.
How does the consolidation of banks influence the stock market?
The consolidation makes it harder to supervise the stock market. Implementing an effective regulatory and supervisory framework should create a counterbalance. Listing new companies like Estonian Telecom and other infrastructure companies on the stock exchange could solve another problem - the problem of dominant shares or stocks on the market.
How is the development of the common Baltic stock exchange proceeding?
The preparations for this project have proceeded somewhat more rapidly in Latvia and Estonia. There is an active exchange of information and ideas between the two countries. The cooperation with Lithuania is still in its initial stages. The project would offer obvious benefits. The merger would create a stock market with better investment possibilities. The share of the dominant stocks would diminish and the market's volatility would decrease. It should also be noted that small stock markets face certain difficulties in attracting foreign investors who are interested in minimizing the fixed costs on familiarizing themselves with the market.